In the midst of a crisis we all have a choice. We can run inside and put our heads in the sand via Netflix and memes or we can decide to do something about it. The past week I have been shut inside like many of you but the intensity of my projects has picked up. Not only am I continuing to blog and interact with readers via Instagram, I have been busy trying to arrange desperately needed medical supplies to be shipped into the NYC area from Asia. Then there is my day job for which I am working from home.
I have also been fielding a number of questions from family, friends and acquaintances on how to manage the route in the stock market and what to invest in. Every crisis is different and we tend to be backwards looking when it comes to these events in regards to how the market will react, but there is reason to believe that this crisis will play out different in the investing world.
Wealth Managers as Epidemiologists
Never before have wealth managers spent so much time talking to disease experts. Those that do and those that are doing deep research into how diseases spread, stricken a population and are defeated, are much more cautious right now.
Take the story of Cresset Asset Management, which oversees $6 billion. The founders have been consulting with epidemiologists and the information they have relayed has convinced those at Cresset that this is going to be longer and worse than we think.
There is a perception by their clients that the way the government is going about tackling this is all wrong, that essentially they are trying to attack a public health crisis as an economic crisis. In essence, we are treating the symptoms (GDP decline, unemployment) rather than the sickness itself (the spread of the virus and overwhelming of our healthcare resources).
There are a number of reasons to think that this may drag on including a double wave scenario envisioned by London Imperial College which has been circulating on the internet and contributing to some confusion.
Source: Tomas Pueyo
The chart above has been criticized in terms of its assumptions but makes the case that social distancing will simply delay a large wave of hospitalizations until late in the year. The shaded area represents the assumed lockdown time period of social distancing lasting until August end. This scenario is clearly one which will absolutely crush the economy to a point where the majority of businesses will likely fail.
This may be where the pessimism of some of the wealthy is coming from but as Hubei has shown, there is an alternative that can stop the spread. This alternative will require vast “tracing” (tracking down and putting in quarantine those who are sick and their contacts) and strict social distancing to defeat the virus without seeing multiple waves.
In this case, Tomas Pueyo offers an alternative where the initial lockdown, which we are in right now, involves aggressive recruiting, treatment, testing, building healthcare capacity and increased production of needed supplies.
Source: Thomas Pueyo
His scenario sees us using the quarantine time to learn more about the virus, recruit personnel, improve treatment, getting proper testing and tracing, building up the healthcare infrastructure and understanding better the cost benefit measures for fighting the virus. The second phase sees a smaller bump up in cases later in the year when we learn to track and trace the virus better and slow it’s spread. It’s an optimistic scenario but one that is possible.
Less important than the lives such a scenario would save is how the economy and markets will react and where we the market sees things going from here. The market is aware that the outcomes mentioned above are possible and that is driving a lot of the uncertainty. The fact that we don’t have a definitive timeline to getting things under control is contributing to huge gyrations in the market as well as market watchers reaching for their antacid tablets.
The Stock Market Will not go to $0
No matter what the outcome, it’s important to keep in mind that certain companies will survive no matter what happens. Right now there are some companies that are being strengthened by this crisis. Wal-Mart is flexing its muscles showing how critical it is to our daily lives. Amazon is delivering much of our needed goods to our doorstep, Microsoft is still worth over a trillion dollars propped up by its commercial cloud computing among other businesses, and Google remains a company proving itself essential to our modern devices. Despite everything you’ve seen in the headlines, many of these companies are still valued far above where they were 5 years ago and many of them are still valued above where they were at the bottom of the 2018 downturn. To get an idea of how little they have been affected in terms of valuation just look at QQQ, the ETF which tracks the Nasdaq for the past 5 years.
Source: Google
Rather than the tech Wild West that we saw in the dot com boom, big tech is set to further consolidate its gains from this crisis as over leveraged and risky start ups shrivel up along with the venture capitalists that funded them. Most notable of these right now may be SoftBank, which is selling $41 billion in assets to be able to manage its debt load and cover for losses from debacles like WeWork.
The pandemic will also present new opportunities no matter how it plays out. Work from home will now become essential to adapt for business continuity, not just something nice to have. When the pandemic does subside, the IT industry can look forward to committed future spending from businesses to ensure that they have the capacity to have almost all their staff work from home. The pandemic has laid bare some company’s lack of investment.
Some Companies Will Go to $0
The retail apocalypse was already in full swing when the pandemic hit and this may see the death knell for many names in the retail industry. Names like JC Penny and Macy’s may never recover if we go into a prolonged and multi wave pandemic scenario, a V like and fast recovery is the only hope for many retail stores to survive.
The energy industry also picked a bad time to have an all out price war too. Gas has dropped below $1 in some places and even before the crisis was facing headwinds that saw the entire US sector’s market cap fall below that of Apple. The crushing price fall and abrupt lack of demand due to quarantine have packed a one two punch that is likely to set off a wave of mergers and consolidation, leaving fewer and larger names in its wake.
Source: The New Daily
I am also concerned about banks. The market is too. Many of the largest have fallen much more than the overall market and for good reason. Despite strong capital ratios and passing Fed stress tests which foresee another crisis like situation, it remains to be seen if they really can withstand the wave of defaults, bankruptcies and restructurings that this crisis could produce. The length of the quarantine and the fight against the virus are key for the survival of the banks. I do not think that all banks could survive a double wave scenario that causes another massive quarantine again in the latter half of 2020. Were that to happen, they could likely be looking at the government stepping in again to assist as they did in 2008.
Airlines and hotels also will be at risk. Airlines have spend a number of times in bankruptcy in the past so the request for a bail out from the government is an eye roller. Investors may need to get wiped out and debts restructured for the current incumbents to move through. It will only be the end of the world for their current shares. Hotels are in a difficult position as they had already been seeing an onslaught from Airbnb and its imitators. The industry has fallen off a cliff in the wave if the pandemic. Look out for the bankruptcy of a number of hotel firms without a V shaped recovery. The silver lining may be that many of them do not own the buildings anymore, they just manage them. Property owners may be willing to cut a deal once the industry shrinks so some of them may be able to emerge from any bankruptcy with their reputation still somewhat in tact. Again, it will be the end of the line for their investors though.
Conclusion
The performance of the tech companies amid an environment where unemployment may hit 30% should give us hope. Despite all the disruption many of us have faced lately, it’s pretty amazing that a massive company like Microsoft can still be making money. Imagine being stuck inside 25 years ago with no phone, no streaming entertainment and no way to work, things may have gotten much darker much more quickly then. However we flatten the curve or experience multiple waves of this pandemic, one thing you shouldn’t be as worried about is the stock market going to $0.
The information provided by www.cashchronicles.com is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. www.cashchronicles.com does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any tax or investment decision without first consulting his or her own financial advisor or accountant and conducting his or her own research and due diligence. To the maximum extent permitted by law, www.cashchronicles.com disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.